Medicare Compliance & Reimbursement

The rise of specialty hospitals funded mainly by physician investors is a recent phenomenon that many believe increases questionable service utilization and threatens the viability of full-service hospitals. Both Congress and the Centers for Medicare & Medicaid Services have been mulling imminent moves against the boom. However, CMS has determined it doesn't have the authority to act, and the outcome of congressional action is unclear.

Physician incomes are stagnating and the economy is slow. So it's no surprise that doctors are making use of the so-called whole-hospital exemption in federal physician self-referral laws to get involved in specialty facilities, said Gary Taylor, a principal in equity research for Banc of America Securities, at a June 18 briefing sponsored by the nonpartisan research group Center for Studying Health System Change (HSC). The two biggest specialty-hospital niches, cardiac services and orthopedics, are worth $140 billion and $100 billion a year, respectively, and growing rapidly, said Taylor.

Despite how lucrative the businesses are, however, physician ownership is "absolutely critical" to their skyrocketing growth, said Taylor, a hospital analyst. "If you take away physician ownership, this industry will go away overnight."

That's where Congress may come in.

The so-called Stark law that limits physicians' ability to refer business to entities in which they have a financial interest contains an exemption for physician ownership interest in an entire hospital, on the argument that one physician could do little to skew referral patterns in his or her favor in the context of a broad range of services. The exemption was created in part to allow integrated groups of physicians, such as at the Mayo Clinic, to own hospitals. Ownership interest by a physician of one part of a hospital is prohibited, since a single set of hospital services are subject to financial gaming.

Currently, however, specialty hospitals offering only cardiac or orthopedic services, for example, fall under the whole-hospital exemption, a situation that many believe can easily be used to skew service use in a doctor-owner's favor.

The Senate version of Medicare prescription-drug legislation contains an amendment developed by Sen. John Breaux (D-LA) that would remove specialty hospitals from the exemption. Under the provision, physicians could have a financial relationship with a hospital only in the case of a "comprehensive inpatient and outpatient" facility for which the referrals of the physician would be "insignificant in relation to the overall scope of services."

Breaux's change is backed by the Centers for Medicare & Medicaid Services, which earlier this year contemplated doing the job itself through an agency rulemaking. Recently, CMS attorneys determined that the agency can't make the change, in part because only states have the statutory authority to define the term "hospital," according to an agency staff member.

House Ways and Means Committee Chair Bill Thomas (R-CA) also has said that he may be interested in moving to shut down the specialty-hospital loophole. Thomas hasn't committed himself to a legislative provision, however. Meanwhile, though stemming the tide of physician-owned specialty hospitals is the aim of some policymakers, others take an even dimmer view of the whole-hospital exemption, contending it should be dumped in its entirety, said the CMS staffer. "The general concern is that if compensation and investment are structured in certain ways, it can lead to overutilization," he says.

CMS Administrator Tom Scully shares that view. While Scully said at the HSC forum that he had "no problem with specialty hospitals," he pronounced himself "very concerned about the perverse incentives of the whole-hospital exemption" generally. "I strongly feel personally that we should close" it, he said.